Residency - RWT and approved issuer levy
2013 case note - appellants resident at relevant time and therefore liable to account for RWT - approved issuer levy, statute bar, evidence exclusion rule.
Income Tax Act 1994, Tax Administration Act 1994
The Court found the appellants were resident at the relevant time and were, therefore, liable to account for resident withholding tax ("RWT"). Further, the appellants' arrangement was also confirmed a tax avoidance arrangement.
This was an appeal by the appellants against the decision of the High Court upholding the Commissioner of Inland Revenue's ("the Commissioner") assessments (Vinelight Nominees Limited v Commissioner of Inland Revenue  NZHC 3306, an appeal of a decision of the Taxation Review Authority ("TRA") in Case 11/2011 (2011) 25 NZTC 15,177).
The Chin family carried on business in New Zealand through Vinelight Investments Limited ("VIL"). VIL's business activities were financed by interest-free loans made by a Hong Kong registered company also owned by the family - Weyand Investments Limited ("Weyand").
In 1998, the family affairs were reorganised on advice from Ernst & Young. Briefly, the Vinelight Trust ("the Trust") and its corporate trustee, Vinelight Nominees Limited (Vinelight), were created. VIL assumed an obligation to pay management fees to Vinelight with Vinelight assuming liability for the debt then owed by VIL to Weyand (with interest now payable). The shares in Weyand were transferred from Rodney and Sandra Chin to their three children who also joined them as directors of Weyand. Vinelight then registered as an approved issuer for the purposes of approved issuer levy ("AIL") and the loan from Weyand was registered as a security. From 1998 to 2005, Vinelight paid AIL at the rate of two per cent on the amounts of interest paid.
In 2003, the arrangement was altered after an opinion provided by Ernst & Young recommended changes including the resignation of Rodney and Sandra Chin as directors of Weyand (and the children in anticipation of their return to New Zealand) and that the directors should hold directors' meetings in Hong Kong.
The Commissioner assessed Vinelight for RWT for the periods 31 March 1999 to 31 December 2002 and for non-resident withholding tax ("NRWT") for the periods ended 31 October 2003 to 28 February 2005. Weyand was also assessed for income tax for the years ended 31 March 1999 to 31 March 2003.
The Court dismissed the appeal.
The Court agreed with the earlier decisions in the TRA and the High Court that at all material times, until its affairs were restructured, Weyand's centre of management lay in New Zealand. The Court noted that the conclusions of fact reached in the lower courts were not in fact disputed before the Court of Appeal and also added that the New Zealand and Hong Kong bank accounts were managed by Rodney and Sandra Chin in New Zealand.
Further, the Court did not accept that the Court should distinguish between acts of "superior" and "administrative" management, noting that this approach would have hearing authorities treating some dimensions of management as wholly irrelevant while conflating the test of "centre of management" in section OE 2(1)(c) with the "acts of directors" test in section OE 2(1)(d) of the Income Tax Act 1994 ("the Act").
Was Vinelight Nominees liable to account for RWT?
There were four sub-issues:
- Did section 138G of the Tax Administration Act 1994 ("TAA") preclude Vinelight from making arguments under section NF 2(4)(b)(ii) of the Act?
- If not, were the interest payments made part of Vinelight's taxable activities for the purposes of section NF 2(4)(b)(ii)?
- Did section NF 5 of the Act apply so as to exclude Vinelight for liability to deduct RWT?
- Was the Commissioner time-barred from making RWT assessments for the 1999 to the 2001 income years?
The Court noted that section 138G of the TAA requires that the parties make full disclosure in their respective statements of position ("SOP") to ensure as far as possible tax disputes are resolved in dialogue between taxpayers and the Commissioner, not in litigation.
The Court noted that the appellants' claim under section NF 2(4)(b)(ii) of the Act did not surface until counsel opened his case before the TRA.
The Court stated that neither party's SOP identified the taxable activity issue at all. While the Commissioner listed section NF 2 in a list of provisions relied upon in her SOP in support of an unrelated proposition, this was listed only because it is the charging provision for RWT and could not put in issue all of its requirements. The Court noted that a reasonable person would not think the Commissioner had made taxable activity an issue merely by listing section NF 2 for a wholly unrelated and uncontroversial purpose. Further, the Court concluded that Vinelight knew all along that the Commissioner relied upon section NF 2 and therefore could have denied liability under that provision in its own SOP.
While the Court declined to address the merits of the submissions on the issue, for completeness the Court referred to the TRA's conclusion that the interest was paid in the course of Vinelight's taxable activities.
Section NF 5
The Court concluded that Vinelight's claim that it was not liable to deduct RWT, as it had on reasonable grounds and having made all reasonable inquiries concluded that Weyand was non-resident, could not succeed.
The Court noted that the High Court appeared to accept the appellants' argument that the "all reasonable inquiries" test was confined to inquiries as to facts. However, the Court disagreed, seeing no reason to confine the natural meaning of the language in that way. The Court noted that in this setting, it may well be reasonable to expect some taxpayers to make inquiries of a relevantly qualified professional advisor, observing that the reasonableness requirement extends to the content of the taxpayer's inquiries.
As for the "reasonable grounds" requirement, the Court accepted that advice from a qualified advisor may supply reasonable grounds provided the taxpayer has made reasonable inquiries of the advisor.
The Court considered that Vinelight had not actually concluded that Weyand was non-resident and in fact (agreeing with the High Court) all Vinelight did was follow a course of action devised by Ernst & Young, assuming it would work. The Court accepted that advice was not given by Ernst & Young on this point until 2003 and did not accept that residency advice was implicit in earlier work provided by Ernst & Young.
The appellants argued that while RWT returns were not filed, a return need not be filed in the prescribed form and, in this case, the AIL returns were sufficient.
The Court noted that section 50 of the TAA provides that every person required to deduct RWT shall deliver to the Commissioner a statement in a form authorised by the Commissioner showing such details in relation to the payment of RWT as the Commissioner may prescribe. The Court concluded that the Commissioner has prescribed the form IR 15P (as opposed to the IR 15A for the return of AIL) and therefore agreed with the High Court that the time bar did not apply in this case.
Tax avoidance arrangement
The Court (agreeing with both the TRA and the High Court) found that the arrangement was a tax avoidance arrangement. Further, the Court concluded that the tax avoidance was not only a more than merely incidental purpose of the arrangement. Rather, it was the dominant purpose of the arrangement.
There were two sub-issues:
- Did section 138G of the TAA prevent the appellants from challenging the Commissioner's reconstruction?
- If not, was the Commissioner's reconstruction possible in law?
The Court, agreeing with both the TRA and the High Court, considered that the reconstruction issue had not been sufficiently disclosed in the SOPs. While the Commissioner raised the reconstruction power, that discussion was directed to a different issue, namely who might suffer the consequences of reconstruction. The Court concluded that the Commissioner could not reasonably be expected to appreciate that an issue arose about her capacity to reconstruct.
Was reconstruction possible in law?
The appellants submitted that the reconstruction power does not extend to adjusting tax rates.
The Court concluded that the Commissioner did not adjust the gross resident withholding income, any deductions or available losses. Rather, the Court considered that NRWT is payable when a payment of non-resident withholding income is made, and where NRWT is not paid, the sum in default becomes a statutory debt payable to the Commissioner. In this case, the Commissioner did not need to adjust the level of non-resident withholding income. Rather, she only needed to assess Vinelight for NRWT on its reported non-resident withholding income. Accordingly, the Court considered that the Commissioner did not exercise her power of reconstruction.
The Court considered that none of the grounds of appeal were about as likely as not to be correct and that the arrangement was entered into for the dominant purpose of avoiding tax. Accordingly, the shortfall penalties were correctly imposed by the Commissioner under sections 141B and 141D of the TAA.